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Lost Crypto Coins and Deflation

One of the biggest fears people have with the various crypto coins is that they can be lost forever. Unlike cash or other physical items that when lost can be found by someone else, once coins are lost permanently there is no way for anyone to retrieve them. This is made an even worse problem when you take in to consideration the fact that there is no way to tell how many coins have been lost. The best we can do is take the reports people give and use that to help estimate the total number of lost coins, but that is highly inaccurate. While we do know the total number of coins (which is going to be 21,000,000 in the case of Bitcoins), the actual number floating around is going to be decreasing on a daily basis.

How Are They Lost?

There are actually a few different ways that all of your coins can be lost forever:

  • Adding a password to your wallet and forgetting what it is
  • Formatting your computer and not backing up your wallet first
  • Losing your wallet through some other issues (such as a computer crash, a wipe of your flash drive, etc.)
  • Accidentally sending coins to an address that does not exist

Each of these will ultimately result in you losing any coins that were tied up forever. Along with this, because the coins still “exist,” but are no longer able to be obtained by anyone, they still take up place in the maximum of 21 million coins, meaning that they will never be replaced.

What Happens: Inflation or Deflation?

The first thing that has to happen to answer this question is to understand what each of these are. Inflation is what we most commonly see in the economy (generally this will not depend on the country, either; all, for the most part, work the same). The effect of it is that prices for items go up, as more and more money is introduced in to the wild. To help better understand this, let us use an analogy:

On one hand you have a group of ten people that each have ten coins. They each want something from another person, and let us say that each item is of equal value. So what happens here is that each item is worth ten coins. When we introduce another hundred coins the next year, there is now an average of twenty coins per person. If each person still wants just one item from everyone else, the price has now risen up to twenty coins. This is inflation in that the cost has risen due to the amount of money available increasing. It will usually happen over a somewhat slow period, but this is the end result.

Now, on the other hand we have deflation. This is what would happen were the same situation above to happen again, only instead of adding the ten coins, we would take five away. At this point there would be five coins left total to split among the people, so to keep all items affordable for everyone the prices would need to be dropped to half of their original value (or to half a coin). In other words, by deflating the value, the actual value of the currency is what is increasing this time, rather than the prices of items.

As you can probably already tell based on these two analogies, what Bitcoin (or really any crypto coin) will experience due to the increasing number of lost coins is deflation. This is because with each coin that is lost, the value of the rest increases to help compensate for it. While it may not be (and likely probably will not be) a direct one to one ratio (meaning that if half of the coins are lost, the other half double in value), its impact will still be seen.

If you are not quite understanding how this works, think of it like this: supply and demand. As supply increases and demand stays the same, the prices go down. As supply decreases (such as losing coins) and demand stays the same or increases, the prices go up (and so the value of each coin goes up as well). Really, when you think about it, the pricing of the different cryptos works just like selling physical items; the more you have and the less people want, the less you have to charge to get them off your hands.

What is the Loss Effect Over Time?

This is a great question, and one that is still kind of hard to guess just because crypto currencies are still pretty new, and the way that they work is different than, say, gift cards and other similar things. As a guesstimate, based on how the economics behind coins should work, though, we will see a continuing deflation effect, in which the coins will keep getting more and more valuable. This brings up concerns by many people in what happens should a Bitcoin hit, say $10,000. Really, though, this is nothing to worry about. Being that Bitcoins are already divisible by billionths (a single microcoin is 1/1,000,000,000 of a full coin) this should be something we never have to worry about. Even if we wanted to break the lowest denomination (a microcoin) into being a penny, that would make the maximum value of a whole coin $10,000,000. As you can see, this is probably unlikely and therefore there should be no problems with values raising in the future. And even if they did become worth more than $10 million each, new methods could be designed to get around the problem!

Why is it Good When Others Lose Coins?

As we looked at earlier, when coins are lost, deflation starts happening. As a result, the coins you hold end up becoming more and more valuable the longer you hold them. This is the same way that classic cars and things like the Ferrari Enzo work. Being that these are no longer being created, each one that is destroyed (by wrecking, weather, or some other thing) increases the value of each of the other remaining vehicles. The coins are the same way, in that every time a coin is lost your value will rise.

Looking at it like this, it may seem like a positive thing when tons of people lose their coins, but not necessarily, as we will look at now.

Why is Deflation Bad With Crypto Currencies?

Unlike the cars mentioned earlier, the crypto currencies are slightly different. Whereas a car has a true value (it is something people can hold and see), the coins we hold are not real. They have what is considered as a “perceived value,” much like cash. The cash we hold has no true value, but rather its value depends on the society it is used in and how much the people agree it should be worth. In the same sense, the coins we hold are the same way: while they have no true value, they are worth what the community is willing to agree on (from the side of both sellers and buyers).

But why is all of this important to understand? The more people there are taking part in anything that has a perceived value, the more chance it has to increase in worth. As an example, if you take a small group of people they may decide something has little worth because none of them really have any desire or use for the item. On the other hand, the more people that get involved, as you might suspect, the more people are available that may be able to make use of whatever it is. As a result, the worth continues going up because it ends up being more wide spread. When we look at coins, the same exact thing happens: the more people that get involved, the more emphasis on worth we will see. And the more coins there are available to spread among people, the more people can get involved. As the coins start to disappear in greater numbers, so will the population that is able to utilize the coins, and its worth will likely decrease as a result.

Back to the car scenario, take our current vehicles. These are bought in very large numbers by the masses because they are new and people like new vehicles. As they start to get older, they start catering more and more towards people who either want one of the cars because of their lower price or because they want something that is no longer created anymore. As a result, the encompassing population of people interested in the cars starts to shrink, and it gets harder and harder to sell them. It's important to realize that when looking at this, the cars can still be sold, and some have great worth to them. But compared to brand new cars, there is really no comparison. The older the car is (when it comes to classic) the harder it is to find someone that has the income to support the purchase, as well as the collective desire to take the car.

What About New Alt Coins?

Alt coins are something we have been getting flooded with recently, and as it appears there is not going to be any stop for a while. As long as they keep being profitable in the first few days or weeks, they will keep being released, but what I want to look at here is the real alt coins; those that are not here temporarily but actually have a strong backing and look like they are going to be here to stay. An example of this would be Litecoin.

So we have looked at how deflation will be experienced due to the constant loss of coins on the market, but not really what the solution is. Altering the way Bitcoin works to allow even more coins to be created would be too much of a problem, I think, so what would be the method of getting around the billion dollar coins in the future? Alt coins!

In a sense, each alt coin that becomes successful will help take a part (although pretty small) out of Bitcoin's value, due to people taking the smart approach and spreading out their investment and wealth in to more than just one bucket. This means that, indirectly, they cause a small amount of inflation to occur with Bitcoin, in which the value of them starts to go down as people take some of their money out and spread it to the other coins.

This is not an optimal solution, but it is something we are already seeing right now. A lot of people feel that we are still in the “Bitcoin bubble,” but the coins are still getting a ton of press and are becoming more and more popular on a daily basis. For this reason, I do not believe that the issue is the coins themselves, but rather that people are investing elsewhere. This is not a bad thing, though, as the more money that is put in to crypto currencies as a whole, the more stable the entire foundation should become. So while Bitcoin may be getting less and less thrown at it now, more money is being put in to the others and therefore they are all flourishing as a result!

Will Bitcoins Still Be Usable if the Price Goes High?

This is a question that has been discussed a few times, and the answer appears to be a yes. Because the coins have eight decimal places, this means we can make transactions with amounts as small as a micro Bitcoin. And because it is all based on a base ten system, that makes conversion ridiculously easy to complete, so there is no real downside to having to transact using smaller and smaller amounts.

A question that does come to mind, though, is how the fees will be calculated if we are transacting such small amounts of Bitcoin, but hopefully that is something that has been thought out. There will need to be some way to reward people for still hashing away at new blocks, while not costing a ton of money to people when they want to send money to someone else. For example, if we are looking at a micro Bitcoin as being worth a dollar, and you want to just send one, how can you pay a transaction fee when you are already dealing with the smallest denomination possible?

My hope for this is that plans have been worked out to help combat this. I feel that adding another decimal place or two to the Bitcoin system if it is needed would not cause too many issues, as it is not actually creating new coins, but it would require a big adoption to the new protocol to make it happen. Either way, all of this is thought for the future, which could be a hundred years or more from now!

Final Thoughts

I love the way Bitcoins are set up, and what it represents. I think the fear of deflation occurring with the coins is a legitimate one, although I really do not see it becoming too big of an issue as there are ways to get around the problem, should we ever come to that. Along with this, the other coins, alt coins, help to inflate Bitcoin up, slowly but surely, so that at some point we should see a pretty stable price valuation all around.

Bitcoin


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